Will the ECB’s Lagarde Try to Talk Down the Euro?
Reprinted from the FT – 07/09/2020
European policymakers must ask if the single currency’s strength is holding back the bloc’s economy; Can copper’s barnstorming run continue? And the Fed’s target for US inflation seems a long way off.
Will the ECB’s Lagarde try to talk down the euro? The euro’s rapid rise in recent months has set alarm bells ringing at the European Central Bank, with its policymakers worrying that the currency’s strength is holding back the bloc’s economy and dragging down prices.
After ECB officials voiced those concerns last week, the euro retreated after briefly touching a two-year high of $1.20. “The euro-dollar rate does matter,” said chief economist Philip Lane. Investors are waiting to see whether Christine Lagarde, the ECB president, will echo her colleague’s concerns at the bank’s policy meeting on Thursday. “She’s at least got to give a nod to what other central bankers have said, [or] else the market could take it as a green light to buy the euro again,” said Stephen Gallo, European head of FX strategy at BMO.
“But at the same time, she has to be careful. If they fire that bullet and it only has limited impact, that could be even worse.” Most analysts think the ECB will refrain from expanding its asset purchases or cutting rates further to weaken the euro, preferring instead to signal its intentions to lower its inflation forecasts after the region slid into deflation last month for the first time in four years.
“We don’t expect any change at this meeting, although we expect the ECB to stress that it stands ready to do more if warranted,” said Morgan Stanley economist Jacob Nell. He thinks the central bank is unlikely to push back against the strong euro, arguing that it reflects an improving outlook for the single market and a vote of confidence in the EU’s €750bn recovery fund, earmarked for economies hit hard by Covid-19.
Was that the end of the bull run in copper?
Copper, the world’s most important industrial metal, has enjoyed a barnstorming run from its March lows, rising almost 45 per cent as China’s economy clicked back into gear after coronavirus lockdowns ended.
The number of bullish bets laid by hedge funds, meanwhile, soared close to the highest levels on record. But after reaching a two-year high of $6,830 a tonne on Monday, copper was hit by a wave of profit-taking as equity markets plunged and the US dollar strengthened. It ended the week at $6,775 a tonne. Some analysts say there is some life yet in the bull market.
First, demand in China, the biggest buyer of the metal, continues to run hot. This was underlined by the Caixin manufacturing purchasing managers’ index for August, which registered its highest reading since January 2011.
Moreover, trade data showed China’s imports of refined copper were up 90 per cent year-on-year in July.
Second, stockpiles are dwindling. Copper inventories on the London Metal Exchange have sunk to a 15-year low of 84,650 tonnes, with almost half of that metal already earmarked for removal.
This has triggered talk of a supply squeeze. Citi thinks prices could hit $8,000 a tonne if the market swings into a deficit next year as demand in the US and Europe starts to pick up.
Rising production from South American mines would help to ease some of the pressure on copper supplies, as will greater availability of scrap material. However, some analysts say tight inventories and China’s seemingly insatiable appetite for commodities both bode well for further price gains.
How far will inflation be from the Fed’s target?
The releases of two measures of US inflation this Thursday and Friday have taken on greater significance since the Federal Reserve made a policy shift last month, announcing it would tolerate periods of faster price rises. Both readings are expected to remain a long way off the Fed’s 2 per cent target after a collapse in the demand for goods suppressed inflation during the height of the coronavirus pandemic.
So-called core consumer prices, an underlying measure that strips out volatile items such as food and energy, are expected to climb 0.3 per cent month-on-month, following a 0.6 per cent gain in July — the sharpest increase in almost three decades. The year-on-year number is expected to be 1.7 per cent.
The producer price index, a measure of wholesale price rises, is projected to climb 0.2 per cent in August from the previous month but be down 0.4 per cent year-on-year. Some analysts argue there is only so much the Fed can do to underpin prices.
More fiscal relief from Congress is needed, said Richard Flynn, UK managing director at Charles Schwab, referring to the failure of lawmakers to agree on a support package after some key benefits expired in July. “[Stimulus] would likely have a more immediate effect in boosting growth, employment and inflation,” he said.